Question

Check my work Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 111,000 kilometers during a year, the average operating cost is 12.2 cents per kilometer. If a truck is driven only 74,000 kilometers during a year, the average operating cost increases to 14.1 cents per kilometer. Required: 1. Using the high-low method, estimate the variable operating cost per kilometer and the annual fixed operating cost associated with the fleet of trucks. 2. Express the variable and fixed costs in the form Y = a + bx. 3. If a truck were driven 92,500 kilometers during a year, what total operating cost would you expect to be incurred? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Using the high-low method, estimate the variable operating cost per kilometer and the annual fixed operating cost associated with the fleet of trucks. (Do not round your intermediate calculations. Round the Variable cost per kilometer to 3 decimal places.) Variable cost Fixed cost per kilometer per year Required Required 2 < Prev 8 of 10 !!! Next >

Answer 1

Hoi Chong Transport Ltd.

1) Summary:

	Total Kilometers	Operating cost per Kilometer	Total operating cost
A	111,000	12.2 cents ($ 0.122)	(111,000×0.122) $ 13,420
B	74,000	14.1 cents ($ 0.141)	(74,000×0.141) $ 10,434
Difference (A-B)	(111,000-74,000) = 37,000 Kms		(13,420-10,434) = $ 2,986

Variable cost per Kilometer = Difference in total operating cost / Difference in total kilometers

= $ 2,986 / 37,000 Kms = 8.070 cents ($ 0.0807)

Variable cost per Kilometer is 8.070 cents ($ 0.0807)

Fixed cost = Total cost - Variable cost

A) $ 13,420 - (111,000×0.0807) = $ 13,420 - $ 8,957.7 = $ 4,462.3

Fixed cost is $ 4,462 per year (approximately)

Check: B) $ 10,434 - (74,000×0.0807) = $ 10,434 - $ 5,971.8

= $ 4,462.2

Fixed cost is $ 4,462 per year (approximately)

2) Y = a + bX

Where Y = Total operating cost

a = Fixed cost per year

b = Variable cost per unit

X = No of kilometers

Y = $ 4,462 + 0.0807 X

c) Y = $ 4,462 + (0.0807×92,500)

= $ 4,462 + $ 7,464.75

= $ 11,926.75

Total operating cost is $ 11,927(approximately)